People often reference the three Cs of lending: credit, cash flow, and collateral. However, there’s a fourth variable in lending that often gets overlooked: emotion. Private lenders often refer to this variable as character (to add a fourth C), and it can often carry the greatest weight of all. The ultimate decision to approve or deny a loan is the result of the emotion created between lender and borrower when the lender decides whether or not to trust the borrower’s representations of the property or project.

How do you create the kind of emotional connection with your lender that will encourage them to approve your hard money loan request?

• Be honest. The biggest mistake you can make is to answer a prospective lenders questions with what you think they want to hear instead of being honest and offering a full disclosure about your property and any potential pitfalls. Often, if there is an issue, or even just a potential issue, an experienced lender may be able to help you troubleshoot it if you are upfront about it.
• Explain the mutual benefits. Be realistic about the potential profits from your project. Your prospective lender will not be impressed with hyperbolic statements such as “This project will be appraised at twice the purchase price after it’s rehabbed!” Instead, you should show them concrete ways in which you plan to improve the property to increase its value, thus ensuring that you will be able to repay the loan in full.
• Maintain open lines of communication. This begins with presenting all necessary documentation to the lender with your loan application, and continues throughout the underwriting process by responding promptly to any requests for additional information or documentation. Also, make sure that you are available via email and phone and that you don’t go radio silent on your lender before or after the loan is approved.

Why does creating a bond with your private lender matter? Unlike bank lenders, private capital and hard money lenders have the freedom to ignore or overlook issues with the other three variables in the lending process (e.g., bad credit, insufficient cash flow, or distressed property) if they like your character and think you and your project are a good investment. By demonstrating that you are honest, realistic and reliable, you can establish a connection with your private capital or hard money lender that will make them want to approve your loan and establish a lending relationship with you that could include financing future deals as well.